Whether you are jumping into a participation program for the first time, forming an additional reinsurance company to handle expanding business or planning for your family’s future, your tax and legal advisors need to be in the conversation.
Many dealer CPAs belong to a dedicated group within the American Institute of Certified Public Accountants (AICPA). Many dealer attorneys belong to the National Association of Dealer Counsel (NADC). Both organizations have made commendable efforts to educate their members on the broad strokes and finer points of reinsurance. As a result, they are increasingly well-equipped to advise their clients.
Let’s discuss five scenarios in which your CPA and attorney can offer invaluable counsel.
1. New Reinsurance Company Formation
Do not rely solely on the advice of your provider when you select your reinsurance company structure. Some of the issues an attorney should advise you on include properly structuring ownership, tax scenarios, domicile selection, dealership production requirements and the impact of important documents such as treaties and trust agreements on your decision.
2. New Reinsurance Provider
If you already own a reinsurance company and are switching providers, your new provider may advise you to form a new company. Regardless, an attorney well-versed in reinsurance can ask the right questions, help you review the differences between the old and new programs, and avoid costly mistakes down the road. They may even be able to show you how to maintain the original company and avoid having to manage another company.
At the very least, you should ask your attorney to review the old provider’s process for running off the old company — including associated costs.
3. Reinsurance Performance Review
Once you’ve been writing business for at least a full quarter, your provider will meet with you to review your reinsurance company’s performance. Although your reinsurance company’s accounting and taxes are typically prepared by an outside firm, your CPA is the one who best understands your business, knows what your financial plans look like and is versed in reading financial reports. They will be able to ask your provider the key questions relevant to your profitability.
If it doesn’t make sense to your CPA, insist on a detailed and thorough explanation. Follow the money.
4. Succession Planning
Dealers use their reinsurance programs to facilitate the transition to the next generation of ownership. Generally, a new reinsurance company is formed with different ownership, using the same producing dealership. Premium and risk allocation are then split among the active companies.
Common pitfalls your attorney will watch for include control group issues and, if trusts are used, they must be set up properly and everything must be documented to the letter.
5. Selling Your Dealership
When you sell the only dealership that is producing business for your reinsurance company, you have three choices:
• Sell your reinsurance company with the dealership. This is not common, but an attorney can assist and work with your buy/sell advisor to ensure there are no complications.
• Put your reinsurance company in runoff. In a somewhat more common arrangement, your reinsurance company will remain open, continue to file tax returns and have its charter renewed annually. This is most useful if you are considering opening another dealership right away — or if the premium is close to being fully earned — so you choose to ride it out.
• Sell your reinsurance company to someone else. The most common choice is to arrange for the sale of your reinsurance company to a third party. Start with your provider. They typically will offer the most favorable terms to meet your immediate financial objectives.
Reinsurance can help secure your financial future. However, it’s not without the potential for some missteps along the way. Whether your provider is eager or hesitant to meet with your CPA or attorney at any stage, you owe it to yourself and your family to get the best advice available.
